UNCTAD's Commodities and Development Report 2023 outlines how commodity-dependent developing countries could pursue inclusive economic diversification in the context of the global energy transition.
Decades of overreliance on exporting a few raw materials, such as oil, copper, cacao and wheat, has hindered these nations' growth and undermined their people's well-being.
Many of these countries have untapped potential for renewables like solar and wind that could broaden their economic horizons and improve livelihoods.
But the diversification process needs careful navigation to avoid worsening inequalities.
The shift to renewables could leave these countries with vast fossil fuel reserves stranded – including abandoned oil fields, plants and equipment – and this will affect the communities and people that depend on industries like gas and oil.
Another risk is that the surge in demand for critical minerals like lithium and cobalt that are needed for green technologies could undermine diversification efforts in mineral-rich countries.
The report outlines actions to avoid past commodity traps. It offers a blueprint for tailored green industrial policies to ensure a fair low-carbon transition that benefits everyone, striking the right balance between the right to development and the need to protect the environment.
Commodity dependence hinders
growth and development
Commodities, from the cereals in our meals to the cotton in our clothes and the copper in our electronics, underpin global trade.
When 60% or more of a country's merchandise export revenue comes from these raw materials, it's deemed "commodity-dependent".
This dependence exposes countries to volatile commodity markets and makes them more vulnerable to global shocks, such as the COVID-19 pandemic and the war in Ukraine. When prices drop, governments and business earn less – and people lose jobs.
The risks escalate for countries heavily reliant on a single commodity, like Zambia with copper or Iraq with crude oil.
Although commodity dependence is a global concern, it affects developing countries the most.
Between 2019 and 2021, only 12% of advanced economies, including Australia and Norway, were on the list, compared to a staggering 74% of the world's least developed countries.
A total of 29 out of the 32 nations classified as having low human development in 2021 were commodity dependent, according to the UN's Human Development Index.
The road to resilience and inclusive prosperity lies in economic diversification. Countries can do this by climbing value chains in existing sectors – processing cacao into chocolate, for example – or by moving into new industries, like the renewable sectors that will drive the global energy transition.
The report highlights several countries that have shown the way, like Malaysia that shifted from rubber and tin to electronics, and Mauritius, which moved beyond sugar into textiles, tourism and financial services.
UNCTAD calls on commodity-dependent developing countries to:
1Steer diversification efforts towards sectors with high potential to create jobs and boost income.
2Identify and promote priority sectors for diversification, align education to the skills needed and boost efforts to strategically attract foreign investment.
3Begin diversifying along low-emission paths to cut greenhouse gas emissions and reduce fossil fuel dependency.
Harnessing opportunities and avoiding traps
Historically, economic growth and diversification have relied on energy provided by fossil fuels. But the global energy transition opens new, sustainable avenues.
While the shift to renewables poses challenges for developing countries dependent on fossil fuels, it offers vast opportunities.
The report highlights that many of these countries have abundant, yet untapped, renewable energy potential – from solar to wind to hydropower.
Besides diversifying exports and creating better jobs, renewables can also help these nations address energy disparities that hinder development, particularly the urban-rural electricity divide. Innovative solutions like solar mini grids promise to electrify even the remotest corners.
But for these benefits to materialize, these countries must move beyond merely supplying raw materials for the energy transition.
The global push for cleaner energy is boosting demand for metals such as cobalt, lithium and copper – an electric car, for example, requires six times more minerals than a conventional vehicle.
From 2025 to 2030, global mining investments will reach $1.7 trillion, presenting opportunities for countries like the Democratic Republic of the Congo, which produced 68% of global cobalt and held 48% of its reserves in 2022.
However, this "gold rush" for critical minerals risks reinforcing commodity dependence in countries with vast reserves of such metals.
A potential strategy to tackle this is regional collaboration. By using regional trade blocks, such as the African Continental Free Trade Area, commodity-dependent developing countries can leverage their productive capacities and local demand to add value within the region, move up value chains and increase the resilience of the critical minerals industry for all participants.
UNCTAD calls for commodity-dependent developing countries to:
1Maximize their renewable energy potential for hydropower, wind, solar and green hydrogen.
2Move up value chains, especially those involving critical minerals for the energy transition like cobalt, lithium and copper.
3Enhance productive capacities in renewables – including the development of low-carbon technologies – and innovation in green goods and services to improve energy security.
4Take advantage of regional trade blocks and agreements to tap into local demand.
A just transition critical
to addressing inequalities
Countries reliant on fossil fuel exports face hurdles in the energy transition. To limit global heating to 2°C, vast reserves – up to a third of the world's oil, half its natural gas and 80% of its coal – must go unused.
For many communities, a shift away from fossil fuels could spell economic hardship. They'll need new job opportunities and skills training and strong support during the transition.
This is part of what the Paris Agreement calls a "just transition" – ensuring the benefits are shared and those who stand to lose are protected.
A mishandled transition could amplify socioeconomic inequalities. Government intervention is crucial to prevent this from happening. Policies should create opportunities across sectors – for everyone from miners to farmers to tech workers.
Equitable energy access is a glaring concern. Many people in energy-rich developing countries still lack basic access to electricity or clean fuel for cooking.
Every country has the right to develop. Since energy access is crucial for well-being, commodity-dependent developing countries may need to continue using fossil fuels while they remain the most immediate and cost-effective sources available.
The report says, however, that this fix should be temporary, calling for a clear commitment to increasing the energy mix in favour of more renewables. It advocates for a balanced energy transition and calls for stronger global support to equip these nations with the resources, technology and skills they need.
UNCTAD calls for commodity-dependent developing countries to:
1Ensure diversification benefits society broadly, directing investments to support the emergence of more inclusive and sustainable productive sectors in the economy.
2Align education and training with the advanced skills required for manufacturing and key diversification sectors.
3Provide targeted support for workers and communities dependent on fossil fuel sectors to soften the possible effects of the transition on their well-being.
4Ensure universal energy access using all available sources. These countries should receive special consideration in carbon budget allocations.
Green industrial policies:
Tailoring actions to local contexts
The report calls for green industrial policies that adapt to individual country contexts, highlight sectors with high potential for diversification and promote sustained collaboration between public and private partnerships.
These are sector-targeted policies that reshape a country's economic production structure with the aim of generating environmental benefits. They should be tailored to each country's unique needs, emission levels, productive capacities and commodity dependencies.
Economies dependent on fossil fuels could transfer income during boom periods into a diverse asset portfolio through commodity-based sovereign wealth funds (SWFs). The management of these assets should follow strict governance rules that ensure the investments and disbursements benefit all of society.
Those reliant on agricultural commodities should prioritize local crop processing. For example, while African nations produce most of the world's cashews, they export them to Asia for processing. It's also important to adopt low-emission farming, shorten distribution networks and ensure access to affordable capital for newcomers.
Countries rich in metals critical for clean technologies should diversify by adding value domestically before export. They should also bolster links between big mining companies and local industries to build domestic productive capacities while improving environmental and social governance.
Effective green industrial policies should have long-term political and public support and pinpoint sectors optimal for diversification, considering a country's strengths and market prospects. Their scope should extend beyond manufacturing to embrace all sectors, including services.
These policies must also tackle pressing social challenges, including health, education, energy poverty and job creation.
The report provides action points for diversification depending on a country's context.
UNCTAD calls for green industrial policies that:
1Create opportunities for technological upgrading and for building innovation and productive capacities.
2Prioritize job creation by, for example, supporting entrepreneurship, using public works programmes to develop skills, and investing in labor-intensive green technologies.
3Ensure inclusivity, addressing the needs of marginalized groups, including women, to prevent growing disparities. Include specific measures for people and communities that are most vulnerable to the energy transition.
4Pinpoint and promote priority sectors for diversification depending on a country's commodity dependence and market opportunities.
Recommendations per country group
Fossil fuel-dependent countries should:
1Convert hydrocarbon assets at risk of being stranded into sustainable forms of capital, such as skills and infrastructure.
2Establish sovereign wealth funds during boom periods to stabilize fiscal policy by transferring income to a diverse portfolio of assets.
3Ensure transparency and robust governance in sovereign wealth funds, with clear rules for inflows and outflows.
Mineral-dependent countries should:
1Exploit the economic potential from the surge in critical mineral markets for clean technologies by moving up value chains.
2Add value locally and integrate mining activities with domestic or regional value chains, like the Democratic Republic of the Congo and Zambia's joint venture to produce electric car battery components.
3Uphold environmental, social and governance standards, compelling mining firms to affirm their commitment to enhancing job creation, paying taxes and upgrading infrastructure.
Agriculture-dependent countries should:
1Promote local processing to add value to crops before export like turning raw cocoa beans into refined chocolate.
2Level the playing field for local newcomers and smaller firms by improving their access to affordable capital.
3Adopt digital and climate-friendly agriculture techniques.
Global support vital for
inclusive and low-carbon diversification
The global community needs to play a more active role in helping commodity-dependent developing countries tackle the challenges they face and in providing the support needed for green industrial policies to succeed.
Reducing commodity-related vulnerabilities requires global action to curb market speculation and counter price shocks. Stabilization funds could help countries maintain steady export revenues.
Likewise, tax evasion needs more global attention, as it hinders diversification by diverting revenues from commodities that could be reinvested in other sectors.
To transition towards renewables, countries need better access to green technologies that are developed primarily in advanced economies. The report calls for a framework like the UN's Technology Mechanism under the UN Framework Convention on Climate Change to help facilitate technology transfer to commodity-dependent developing countries.
Global trade mechanisms could also provide support. Eligible countries should leverage special treatment provisions under the World Trade Organization to allow local industries and new sectors room to grow.
Foreign investors can help by investing beyond raw materials and channeling funds to processing activities, sectors like manufacturing or services linked to commodities.
Lastly, international climate funding is urgently needed. Africa alone requires an estimated $3 trillion by 2030 for climate mitigation and adaptation, and regions like the Caribbean have conditioned most of their commitments under the Paris Agreement on external support.
UNCTAD calls on the global community to:
1Provide adequate financial support and technical capacity-building to mitigate the climate-related risks associated with the just transition.
2Help commodity-dependent countries manage price shocks by establishing rules to limit market speculation and reintroduce funds to keep export revenues steady.
3Boost cooperation to fight tax avoidance and evasion and direct the global financial system towards more productive investments, such as infrastructure.
4Promote the transfer of green technologies to commodity dependent developing countries. An international plan similar to the UNFCCC's Technology Mechanism could help.